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TABLE OF CONTENTS

• Economic Outlook

• Slow US Growth Spills Over into Canada

• Interest Rates Expected to Ease

• World Growth to Moderate

• Canadian Dollar Expected to Rise

• Oil Prices to Moderate

• Natural Gas Prices to Moderate

• Agricultural Prices Firming

• Canadian Inflation Edging Up

• Economic Activity in Alberta Remains Strong

• Investment Strengthens

• Rig Activity Remains Strong

• Gas Sales Expand with Pipeline Capacity

• Non-Conventional Oil Production Growing

• Major Exports Strong

• Declining Unemployment Rate

• Job Growth Continues

• People Still Moving to Alberta

• Earnings Growth in Alberta

• Disposable Income Showing Robust Growth

• Housing Strong

• Retail Sales Recovering

• Diversification Strengthens Alberta

• Key Energy and Economic Assumptions

• Sensitivities to Fiscal Year Assumptions, 2001-02

• Alberta Real Gross Domestic Product Forecast Benchmark

• Oil Price Forecast Benchmark

• Natural Gas Price Forecast Benchmark

• Canadian Short-Term Interest Rate Forecast Benchmark

• Canadian Long-Term Interest Rate Forecast Benchmark

• Canada/United States Exchange Rate Forecast Benchmark

• Tracking the Forecasts of Oil Prices

• Tracking the Forecasts of Alberta Real GDP

• Announced Major Projects Over $100 Million

ECONOMIC OUTLOOK

A strong rebound in energy sector investment helped the economy grow by an impressive 6.1% in 2000, the fastest growth among provinces. Continued strong economic growth of 4.8% is expected in 2001, led by robust consumer spending and rising exports.

Although energy prices are expected to decline to more sustainable levels, Alberta’s economy should continue expanding at a healthy 3.2% per year, on average, over the medium term. Personal and corporate tax cuts will keep consumer and business confidence high, while exports are expected to rise as major manufacturing and oil sands investment projects begin production.

2000 IN REVIEW

• World oil prices increased from an average of U.S.$19.30 per barrel in 1999 to an average of U.S.$30.29 per barrel in 2000.

• High demand and tight U.S. natural gas supplies boosted natural gas prices to record levels. Between January and December 2000, the Alberta reference price rose well over 200% to $8.73 per thousand cubic feet (mcf). The Alberta reference price averaged $4.50 per mcf in 2000, up from $2.48 per mcf in 1999.

• As a result, investment in the energy sector is estimated to have risen by $4.9 billion, or 47%, to $15.4 billion last year. The average number of rigs drilling in 2000 increased to 295, up 41% from 209 in 1999, while the total number of oil and gas wells drilled increased by 3,987, or 61%, to 10,512 in 2000.

• The rebound in energy investment was a key factor driving Alberta’s real GDP growth, estimated at 6.1% in 2000. The sharp rise in energy prices also raised nominal GDP an estimated 22%.

• Despite some regional problems, net farm income was up 12.6% in 2000. A 4.3% decline in crop cash receipts was offset by a 11.5% increase in livestock receipts as the cattle sector remained healthy and hog prices recovered.

• Building permits increased by 10% in Alberta for 2000.

• The value of manufacturing shipments was up 17.3% in 2000, led by increases in petroleum and coal products (62%), machinery (27%), primary metals (22%), paper and allied products (19%), and fabricated metals (19%).

• The unemployment rate averaged 5.0% in 2000, down from 5.7% in 1999. By December 2000, Alberta’s unemployment rate was 4.8%, the lowest among the provinces.

• Employment increased by 34,900 jobs or 2.2% in 2000, led by increases in trade (11,200), construction (11,000), accommodation and food services (10,600), professional, scientific and technical services (5,900), transportation and warehousing (5,900) and manufacturing (5,800). Skill shortages may be emerging in some sectors.

• The strength of the Alberta economy attracted a net total of 21,951 interprovincial migrants in 2000, up from 13,985 in 1999.

• In 2000, wage settlements in Alberta averaged 4.3%. Strong growth in labour income, the elimination of the provincial surtax, provincial tax rebates, and federal income tax cuts contributed to a 7.1% rise in disposable income.

• These income gains helped increase consumer purchasing power despite the rise in inflation to 3.5%. As a result, retail sales in Alberta rose 8.9% in 2000 and total housing starts rose 3.2%.

GLOBAL ECONOMIC OUTLOOK

• Growth slowed sharply in the United States in the second half of 2000, as the economy responded to the rise in interest rates the year before. The extent and suddenness of the slowdown caught many analysts by surprise.

• The U.S. Federal Reserve has reacted strongly to the continued weakness in the U.S. economy, cutting interest rates by 1 percentage point in January 2001, and by another half percentage point in late March. Although Alberta Finance expects the Federal Reserve to successfully avoid an outright recession, U.S. growth is expected to slow to around 2% this year, down from 5% in 2000. Economic growth is also expected to moderate in the rest of the world.

• The unexpectedly sharp slowdown in the United States has led the Bank of Canada to cut Canadian interest rates by three-quarters of a percentage point since January. Lower interest rates and major federal and provincial tax cuts are expected to keep consumer spending reasonably healthy this year. However, economic growth in Canada is expected to slow from 4.7% in 2000 to around 2.9% in 2001, as exports to the United States slow.

• With slower global demand growth, world oil prices are expected to head down from US$30.20 per barrel in the 2000-01 fiscal year to US$25 in 2001-02, and US$21 thereafter.

• With oil prices declining and increased natural-gas-directed drilling in Canada and the United States, natural gas prices are also expected to fall back from their recent record peaks to average $6.07 per mcf in 2000-01, $5.03 in 2001-02, $3.75 in 2002-03, and $3.44 in 2003-04.

• In contrast, agricultural prices are expected to firm somewhat. Grain prices appear to have bottomed out, hog prices have recovered from recent lows and cattle prices are expected to remain healthy.

• Consumer price inflation in Alberta is expected to fall to 2% this year from 3.5% last year. Provincial energy rebates reduced the CPI index for natural gas in Alberta by close to 40% between December 2000 and February 2001, and moderated the increase in the CPI index for electricity to around 5%. CPI inflation rates are expected to decline as the recent run-up in energy prices is unwound. This will increase consumer purchasing power.

ALBERTA ECONOMIC OUTLOOK

• Alberta’s new personal income tax system, originally announced in Budget ’99, became fully effective on January 1, 2001. Increased personal and spousal exemptions and the introduction of a 10% single rate tax will result in estimated annual savings for Alberta taxpayers of $1.1 billion in 2001, bringing the total tax cut to $1.5 billion, a 23% reduction since 1998.

• The federal government has followed Alberta’s lead in indexing the personal tax system to inflation. It has also cut personal tax rates and eliminated its high income surtax.

• Continued strong employment and wage growth and the large provincial and federal tax cuts are expected to increase the amount of money in consumers’ pockets and raise living standards. Personal disposable income is expected to increase by about 10% in 2001. As a result, real consumer spending is expected to grow 6.3% in 2001.

• Real exports are expected to rise 5.8% this year, as petrochemical and oil sands expansions come into production.

• Energy sector investment will remain strong due to natural gas directed drilling and major oil sands projects. Non-energy investment activity is expected to decline somewhat this year as construction ends and production begins at several major projects. Overall, real private investment in 2001 is expected to be about the same as last year.

• As a result of tax cuts, increased consumer spending and healthy exports, Alberta’s real GDP is expected to grow by 4.8% this year.

LISTS OF TABLES AND CHARTS 

• U.S. growth slowed sharply from 5.6% at annual rates in the second quarter of 2000 to 1.0% in the fourth. The extent and suddenness of the slowdown caught analysts by surprise. A number of analysts are concerned that the current contraction in the manufacturing sector will become widespread and lead the entire economy into recession.

• The slowdown in the United States is spilling over into Canada. Canadian growth fell from 4.5% in the third quarter last year to 2.6% in the fourth quarter. Canadian employment has risen by only 6,900 since last December.

• With inflation remaining relatively subdued, the U.S. Federal Reserve has reacted strongly to the emerging weakness in the U.S. economy. The Fed cut interest rates by 1 percentage point in January, and by an additional half percentage point in March.

• The Bank of Canada has also cut interests rates, although not as aggressively as in the United States. The Bank cut rates by one-quarter percentage point in late January and another half percentage point in early March, citing the unexpectedly sharp slowdown in U.S. activity.

• The Bank is not expected to fully match U.S. interest rate cuts this year, as low unemployment and large federal and provincial tax cuts are expected to maintain healthy growth in consumer spending.

• Given the sharp reduction in interest rates and the likelihood of substantial tax cuts later this year, the U.S. economy is expected to strengthen in the second half of 2001. Overall economic growth is expected to be about 2% this year in the United States, down from a sizzling 5% in 2000.

• Slower growth in the United States is expected to dampen growth in the rest of the global economy, particularly in Canada. Growth in Canada is expected to slow from 4.7% in 2000 to 2.9% this year. Lower interest rates and tax cuts should help sustain consumer spending, even though exports are expected to slow.

• The Canadian dollar has weakened sharply against its U.S. counterpart this year, in common with most other currencies.

• The fundamentals -- low inflation, good economic prospects, a large current account surplus, and a relatively strong fiscal position -- suggest that the Canadian dollar should gradually appreciate over the medium term.

• Strong global economic growth and tight OPEC supply discipline boosted oil prices in 1999 and 2000. Oil prices averaged US$30.20 per barrel in 2000-01, up from US$23.16 per barrel in 1999-2000.

• Prices have eased from their November peaks of around US$35/bbl to around US$27 per barrel in March. In March, OPEC announced substantial production cuts in order to prevent a sharp decline in prices.

• Oil prices are expected to average US$25 per barrel in fiscal 2001-02 and US$21 per barrel thereafter.

NATURAL GAS PRICES TO MODERATE

• Low natural gas inventory levels and high demand for electricity generation resulted in huge increases in natural gas prices in the United States in 2000. By January 2001, the Alberta Reference Price had reached $11.82/mcf.

• In Alberta, increased pipeline capacity has allowed domestic gas prices to follow the U.S. lead. AECO-C spot prices have increased over 100% since last March to around $7 per mcf.

• The Alberta reference price is expected to average $6.07 for 2000-01, up from $2.66 in 1999-2000.

• In the medium term, natural gas prices are expected to fall back as natural gas supplies rebound and demand growth eases.

• Livestock prices generally improved in 2000 due to the recovery in hog prices and continued strength in cattle prices. Livestock prices were up 12% in 2000. Livestock cash receipts remained strong in Alberta, increasing 11.5%, led by hog cash receipts (up 45.6%) and calves (up 25.6%).

• Prices for crops showed some signs of firming. Prices for wheat fell 9.7% in 1999, and remained virtually flat in 2000. Wheat futures prices in February 2001 were 8% higher than in February 2000. Even though crop receipts for barley were up 14.4% in 2000, a 13.3% decline in canola receipts and a 6.2% decline in wheat receipts resulted in a 4.3% decline in crop cash receipts for Alberta producers in 2000.

• In Canada and around the world, higher energy prices have pushed up the overall Consumer Price Index (CPI) inflation rate. The overall CPI inflation rate was 2.9% in Canada in February.

• The core CPI inflation rate, which excludes food and energy, is a indication of underlying inflation pressures. After remaining stable at around 1.5% for the past 3 years, it edged up to 2% in February. This is still in the middle of the Bank of Canada's 1% to 3% inflation target zone.

• Domestic cost pressures remain subdued in Canada. The economy has become less energy-intensive since the 1970s, but more importantly, the rise in energy prices is expected to be temporary and thus has not had a strong impact on inflation expectations.

• Alberta has grown faster than Canada in 8 of the past 10 years.

• In 2000, Alberta's economy grew an estimated 6.1% due to a rebound in energy sector investment. Growth this year is expected to be 4.8%, the fastest in Canada.

• Although energy prices are expected to fall back to more sustainable levels in the medium term, Alberta's diversified economy is expected to expand at a healthy 3.2% as tax cuts boost consumer and business spending, and major projects in manufacturing and oil sands come on stream, increasing exports.

• The rebound in the energy investment dominated Alberta’s economic performance in 2000. Conventional oil and gas investment (exploration and development drilling), combined with continued strong oil sands investment, raised real energy investment an estimated 50% in 2000.

• Real energy investment is expected to increase further, by almost 8% this year as investment in oil sands peaks, and natural gas directed drilling remains strong.

• After modest growth of about 1.3% in 2000, real non-energy investment is expected to fall by about 10% this year as major projects are completed. Corporate income tax cuts should help boost growth in the medium term.

• Non-energy investment expected in the near future includes major projects in utilities ($3.5 billion), transportation infrastructure ($3.9 billion), pipelines ($3 billion), and commercial and real estate developments ($2.8 billion).

• Rig activity remained strong in 2000, due to high energy prices. The number of rigs drilling increased 41.1% compared to 1999.

• In the first quarter of 2001, the average number of rigs drilling was 12.5% higher than during the same period last year.

• The total number of oil and gas wells drilled in Alberta rose 61% in 2000 to 10,512. Gas wells accounted for 69% of the total.

• Conventional crude production has been declining since 1995, and is expected to continue to decline. Non-conventional crude production, on the other hand, has been increasing sharply, and is expected to boost energy exports as new projects come on stream.

• Non-conventional oil production is forecast to rise over 90% from current levels by 2004. It is expected to account for over 60% of Alberta's oil production in 2004, compared to an estimated 43% in 1999.

• Over $16 billion worth of investment projects have been announced for the next 10 years. An additional $25 billion worth of projects are in the proposal stage.

• Conventional crude production has been declining since 1995, and is expected to continue to decline. Non-conventional crude production, on the other hand, has been increasing sharply, and is expected to boost energy exports as new projects come on stream.

• Non-conventional oil production is forecast to rise over 90% from current levels by 2004. It is expected to account for over 60% of Alberta's oil production in 2004, compared to an estimated 43% in 1999.

• Over $16 billion worth of investment projects have been announced for the next 10 years. An additional $25 billion worth of projects are in the proposal stage.

• In 2000, Alberta’s international goods exports were up 59.9%, the highest rate of growth in the country. Machinery and equipment was up 80.6%, and energy products 85.3%.

• Total exports of goods and services, including those to the rest of Canada, are estimated to have risen by 32.1% in 2000 to about $81 billion, led by a $15.6 billion surge in the value of oil and natural gas exports. Exports accounted for 58% of the Alberta economy in 2000.

• The value of Alberta’s exports is expected to increase again this year due to the rising value of natural gas exports and higher manufacturing exports as several major petrochemical plants come on stream.

• Strong economic growth reduced Alberta’s unemployment rate from 5.7% in 1999 to an average of 5.0% in 2000.

• In March 2001, the unemployment rate was 4.8%, the lowest among provinces.

• Alberta’s unemployment rate is expected to decline gradually over the forecast horizon to around 3.5% by 2004. This is low by historical standards.

• Employment growth in 2000 was a healthy 2.2% or 34,900 jobs. Gains were led by trade, construction and accommodation and food services.

• Shortages of skilled labour may have been a factor constraining employment growth in some industries.

• This year, the Alberta economy is expected to create 39,000 new jobs.

• Over the medium term, employment in Alberta is expected to grow at an average rate of 2.3% per year.

• Approximately 153,000 more jobs are forecast to be created from 2000 to 2004.

• After dropping to 13,985 in 1999, net interprovincial migration picked up strongly in 2000 to 21,951, the highest among the provinces.

• Alberta's gains have come mostly from British Columbia and Saskatchewan.

• Over the medium-term, interprovincial migration is expected to add about 15,000 people to Alberta’s population per year.

• Alberta's population reached the 3 million mark in 2000. It is expected to grow by 1.4% per year on average through 2004, one of the fastest rates in Canada.

• Healthy employment growth and skill shortages in some key sectors are boosting wages in Alberta. Led by gains in the health sector and construction, wage settlements were up 4.3% on average in 2000, approximately double the national level.

• Average wages per worker rose 6.1% in 2000. This yields a real wage gain of 2.6% when inflation is taken into account, and continues the trend of rising real wages evident since 1997.

• In 2001, average wages per worker are forecast to increase by 4.7% per year. In 2002 through 2004, average wages per worker are expected to increase by 3.1% per year on average, about 1 percentage point higher than inflation.

• Personal disposable income is expected to increase by 10.4% in 2001, primarily because of personal tax cuts and healthy wage growth.

• For 2002 to 2004 disposable income is expected to grow at around 5% per year.

• These gains are expected to translate into strong housing starts and healthy consumer spending.

• Healthy labour markets, continued net interprovincial in-migration, and Alberta’s strong economy in 2000 boosted housing activity despite higher mortgage rates. Total housing starts were up 3.2% in 2000.

• Urban housing starts have increased 7.7% during the first quarter of 2001 compared to the same the period a year ago.

• Over the medium term, housing starts in Alberta are expected to remain around 25,000 per year due to strong growth in disposable income and a healthy economy.

• Retail sales in Alberta remain strong, increasing 8.9% in 2000. Alberta leads the country in retail sales per capita.

• Strong growth in employment and wages and the final installment of the tax plan are expected to maintain strong consumer confidence and retail sales in 2001.

• Retail sales are expected to grow by 8.1% in 2001 and by 4.4% per year on average over the medium-term.

• Although the rebound in energy sector investment dominated growth in 2000, Alberta’s economy is now more diversified and less susceptible to volatile commodity price fluctuations than it was in the 1970s and early 1980s. Energy accounted for only 20.7% of Alberta’s GDP in 1999, compared to 37.2% in 1985.

• Manufacturing increased its share of Alberta GDP from 6.3% in 1985 to 11.1% in 1999 because of rapid growth in electronic products, wood products, food processing, machinery and transportation equipment, and chemicals.

• The service sector grew from 53.9% of GDP in 1985 to 65.9% in 1999 because of growth in business services (from 2.8% in 1985 to 5.7% in 1999), finance, insurance and real estate (from 9.2% in 1985 to 12.6% in 1999) and wholesale trade (3.8% in 1985 to 5.6% in 1999).

Proposed or Under Construction

* Note that this excludes projects already included in oil sands developments (808 MW) and other major projects (920 MW) which are being proposed, but which are not yet officially announced.

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